COVER STORIES Antitrust , Vol. 2 7, No. 3, Summer 2013. © 2013 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Seeing the Forest Through the SEPs BY JOHN D. HARKRIDER N THE MID-1970 S, THE SOVIET UNION forced the parties to the CPTN/Novell transaction to alter proposed an ostensibly balanced step towards nuclear the terms of their deal to incorporate several protections for disarmament: if the U.S. agreed to ban its Trident open source software, 6 but allowed the Rockstar consortium Ohio-class submarine, the USSR would ban its “anal - to bid for and ultimately acquire the Nortel portfolio. 7 ogous” Soviet submarine. 1 At first blush, this offer The antitrust agencies’ interest in the “smartphone wars” Iappeared to represent a reciprocal approach to reducing the accelerated only when Google, the main driving force behind superpowers’ nuclear capabilities related to submarine- Android, sought to acquire Motorola Mobility—and its size - launched ballistic missiles (SLBMs). able patent portfolio—in an effort to decrease patent imbal - Although many Americans protested against the building ance in the industry and thus deter further attacks on of the Trident submarine, the U.S. Government rejected this Android. The Agencies began to focus on the assertion of offer, and with good reason. At the time, the USSR already SEPs, in particular the alleged risk that suits brought by SEP possessed SLBMs that were more advanced than those in owners seeking injunctive relief would allow them to “hold- the Pentagon’s arsenal. Developing the Trident Ohio-class up” implementers. submarines was necessary in order for the U.S. to achieve The Agencies’ focus on SEP injunctions seemed odd. equivalent SLBM capabilities. The Kremlin’s proposal to After all, no injunction or exclusion order on SEPs has ever ban its “analogous” submarine would not have affected its been issued in the smartphone space in the U.S., and Motor - pre-existing SLBMs—it would have only prevented the U.S. ola did not dispute its obligation to license those patents on from catching up. Thus, what was presented as an even- FRAND terms. Indeed, Apple had refused to pay Motorola handed step towards disarmament actually would have tilt - Mobility anything for its significant portfolio after three years ed the battle field in favor of the USSR and arguably extend - of negotiation under a hypothetical threat of injunction, ed the arms race. which is hardly evidence of hold-up. During this time, Apple Something similar is happening in the current debate reportedly collected up to 80 percent of the profits in the regarding standard essential patents (SEPs). Over the last smartphone industry, evidence that the more significant con - several years, Microsoft and Apple have waged a patent war cern was that firms would hold-out from paying royalties, not against devices running the open source Android operating be held-up from making profits. 8 system, obtaining injunctions, 2 billion-dollar jury verdicts, 3 Moreover, the legal argument for barring even the poten - and billions of dollars in royalties. 4 Apple and Microsoft tial for injunctive relief was novel. As recently as 2 011, achieved those successes despite concerns about the general Microsoft argued to the FTC that FRAND commitments quality of the underlying patents and despite winning only a should not be understood to preclude claims for injunctive small fraction of the claims they filed. relief and that there is “little evidence that patent hold-up in Despite complaints from members of the open source the standards context is a real problem. ”9 Moreover, the community that certain proprietary-source firms had long Commission itself noted in its 2007 Rambus opinion that sown fear, uncertainty and doubt in an effort to limit the injunctive relief was and ought to be available with respect to adoption of open source products, 5 the antitrust regulators FRAND-encumbered SEPs. 10 largely stayed on the sidelines. That began to change when Microsoft and Apple’s endorsement of strict controls on Microsoft and Apple, joined by several other proprietary the availability of injunctive relief for SEPs changed after software firms threatened by open source competition, sought Google’s announced acquisition of MMI. Their proposed to expand their patent arsenals by acquiring thousands of ban on injunctions would (1) prevent Google from using patents from Novell and Nortel. The Department of Justice SEPs to defend itself and other open source distributors and partners from attack, while (2) permitting Microsoft, Apple, John D. Harkrider is a partner at Axinn, Veltrop & Harkrider, LL P, and was and their allies to use their larger portfolios of non-SEPs to co-counsel to Google in its acquisition of Motorola Mobility and counsel obtain injunctions against Android and other open source to Google in the SEP investigation by the FTC. Russell Steinthal, Eric devices. In effect, these companies ripped a page from the Barstad, and Soojin Nam provided invaluable assistance on this article. The views expressed herein are the author’s own and do not necessarily Soviet playbook, proposing what appeared to be a neutral rule reflect those of any client. towards peace, but the effect of which would be to allow them to continue the war on more favorable terms. 22 · ANTITRUST The Federal Trade Commission took a more nuanced those general principles, however, there is frequently dis - approach to the issue. After an in-depth review of the facts agreement—both among SSO members and with non-mem - and theory, the Commission adopted a balanced approach bers—as to how the requirement of FRAND licensing should that addressed the potential risk of willing licensees of SEPs be interpreted and enforced. 12 being enjoined, without completely limiting the effectiveness At one extreme, “innovator” companies with significant of SEPs as deterrents against unwilling licensees and patent portfolios of SEPs (which are generally the result of signifi - aggressors. 11 In short, the FTC endorsed a solution that takes cant R&D investments) tend to advocate for robust inter - into account the dual harms of hold-up and hold-out. In pretations both of what a “reasonable” royalty can be and of doing so, the FTC preserved incentives for firms to contin - SEP holders’ right to enforce their patents against parties ue to invest in standard setting and the many procompetitive that are unwilling to agree to a license agreement and pay a benefits that standard-setting organizations (SSOs) produce. reasonable royalty. At the other end of the spectrum, firms that do not own SEPs, but rather are pure “implementers” of The Role and Incentive Structures of the standard, tend to argue that “fair and reasonable royalties” Standard-Setting Organizations should be lower and that, by promising to license on FRAND By encouraging interoperability, SSOs produce benefits that terms, SEP holders agreed to limit the remedies they would redound to innovators, implementers, and consumers. Many seek for alleged infringement of their essential patents (for of the most significant accomplishments in the telecommu - example, by foregoing injunctive relief or enhanced dam - nications field are attributable to the work of major SSOs, ages). such as the European Telecommunications Standards Insti - SSOs have historically taken a middle ground between tute (ETSI), which promulgated the GSM, 3G, and 4G stan - these two positions, refusing to specify the appropriate dards (and which holds the trademark on “LTE” as a result). FRAND rate and refusing to adopt a categorical rule for or The fact that SSOs like ETSI are diverse groups of firms against injunctions. Such a balanced approach is in the SSOs’ that compete both in innovation and in their implementation self-interest, which in turn suggests it is welfare enhancing. of finished standards is crucial both to their technical and The reason is simple: SSOs represent the interests of both economic success. types of companies and have an interest in adopting a mid - Most of the work of SSOs is done by committees and dle ground that maximizes participation in both developing working groups that are charged with drafting a new standard and deploying their standards. Indeed, many SSO members (or portion of a standard). Such groups bring together rep - are themselves both innovators and implementers, but often resentatives of the key stakeholders to consider the relevant in different proportions for various standards. technical questions and, ultimately, determine the content of Consider, for example, what would happen if an SSO the standard. Significantly, many of the proposals considered were to adopt a uniform rule that royalties must always be by an SSO and its working groups (particularly in the tele - charged against the cost of a component (e.g., a $30 chipset) communications industry) might be patented by one of the rather than the price of the end device (e.g., a $300 handset). SSO members. Moreover, a firm’s representative on a com - Such a rule would—if royalty rates were held constant— mittee might have an incentive to incorporate her firm’s reduce total royalties by a factor of ten. Innovator firms there - patented technology into a proposed standard as a way of fore would be faced with one of several